Thursday, July 17, 2008

Breaking News: Oil specutaltors are innocent! Also, Elvis Lives and is producing the next U2 album!

I am not an expert on the global commodities market. Who cares? This is the internet and I am going to say my piece.

After a round of no-results congressional hearings, the conclusion is inevitably that so-called oil speculators are not influencing the price of oil in the slightest. Oh really? Why then was there a 10% drop in the price of oil overnight when Iran launched test missiles? Did that coincide with a dramatic increase in world oil supply all of the sudden? Or did global demand for oil all of the sudden just drop overnight by 10%? Both of those scenarios would be welcomed, needed really. No, investors saw some signs in the market, got scared, and started selling. Fast.

Several very smart economists have calculated that oil speculation adds an incremental ~$70 to the market price of oil, currently approximately 50% of the cost of a barrel of 'sweet light crude' today. Imagine how our economy would start moving if gas prices were cut in half. Airlines wouldn't be on the brink of closure... Food would get dramatically cheaper. Businesses would more money to invest in new equipment and jobs. Consumers paying $2.25 at the pump would have more money to spend elsewhere. The billions of poor who have abandoned subsistence farming for participation in the world food market might get a chance to eat.

Just think- hedge funds were primary players in the housing and mortgage boom. They purchased sub-prime loans in huge quantities, either directly as Bear Sterns or in the form of CDO's and other securities. When that market collapsed for (and by) them, all those billions of dollars shifted to commodities, the most popular of course being oil. All of them are playing in the oil futures sandbox, and several have actually bought huge warehouses and started filling them with barrels of oil they hope to sell at a profit in the future (hoarding). Not a bad idea really, they stand to make incredible profits. Have they created a bubble just like they did in the housing market? Here is a graph of Los Angeles and National housing prices over the past 10 years, see also oil prices 2006-2008 chart.

Note- oil pricing only current through Jan 2008- it is up almost 50% since then. Yikes!!!

What can be done? Not much to my knowledge... US regulators recongize the problem and are eager to tame the beast, but it is a global market. Only if every country in the entire world (even Switzerland) agreed to uniform regulations on oil trading and speculation would there be ANY impact on prices. Good luck.

Sorry so gloomy, I just wanted to call the provervial cat black here. The well-monied investment industry is making a concerted effort to say they aren't impacting pricing of this precious commodity. I am saying they are. So there!!

PS- We are already seeing other vital commodities being identified for trading and speculation, aka WATER! I am not kidding. Just watch out for the next market coming down the pike- air futures trading. Buy your oxygen rights now before prices double!!!

1 comment:

BryanK said...

I would invite you to read this excerpt from a fascinating book that I own.

Then lets talk :).